With the dollar back into recovery mode and now looking towards a crossroads of what would be a significant change in outlook, US inflation could be the trigger. The weakness of the dollar throughout 2017 has been on the disappointment of Trump’s failure to achieve tax reform or fiscal stimulus, but also the concerns over subdued US inflation. The expectation for a Fed hike in December have been seriously questionable however if these two key factors of tax reform and US inflation that have driven dollar weakness can be turned around, then the dollar may be able to drive a sustainable recovery. The intraday dollar turnaround yesterday came on the suggestion that the Republicans were preparing a tax reform package. This helped to lead Treasury yields back higher, with the 10 year yield back towards 2.20% and a key technical downtrend being tested. With the 2s/10s spread rising again (suggesting a steepening yield curve) the dollar has strengthened again. There will be a key test of this recovery today with US CPI inflation. Yesterday’s PPI (factory gate inflation) disappointed expectations and the CPI is expected to drop back on the core data today. However, a positive surprise could drive a further recovery in yields and the dollar. There is also a focus on the UK with the Bank of England monetary policy. Issues to consider are whether a third MPC member votes for a hike (possibly Andy Haldane) and whether the statement strikes a more hawkish tone given the recent rise in inflation.
Wall Street closed ever higher again with the S&P 500 +0.1% at 2498. However after China’s key data missed expectations (industrial production, retail sales and fixed asset investment), Asian markets were weaker across the board with the Nikkei -0.3%. European markets are a touch cautious too in early moves. There is very little direction on forex majors today as traders look ahead to the key US inflation data. Gold is again marginally lower, whilst oil is consolidating yesterday’s gains.
It is a busy day for tier one releases, with two central banks and US inflation on the agenda. Swiss National Bank monetary policy is first up at 0830BST. With subdued growth and low inflation there is no need for any change in assessment. With Q2 growth weaker than expected and growth diverging with the Eurozone the SNB will be hoping that the ECB goes on a tightening path and it will certainly be lagging the ECB on removing accommodative monetary policy. Then at 1200BST the Bank of England also gives monetary policy. Once more there is little realistic expectation of any tightening, with a 7-2 vote in favour of no change on rates expected. The decline of real wages further into negative following the weaker than expected wage growth which gives the MPC a difficult conversation today. Perhaps a slight hawkish lean on the statement given the rise in inflation but still likely to remains unmoved. The US CPI is announced at 1330BST and is expected to show a slight tick higher on headline CPI to +1.8% (from +1.7%) but the core CPI is expected to drop to +1.6% (from +1.7%). After the PPI disappointed yesterday, it seems as though inflationary pressure in the US are still hard to come by.
Chart of the Day – French CAC 40 Index
Eurozone equities are performing well again and the French CAC is taking part in the recovery. Since bottoming at 4995 in August the market has embarked upon a solid recovery of over 4%. However whilst the rebound may not sound huge, the technical improvement in the market has been significant. A broken downtrend that dated back to early May, in conjunction with momentum indicators in strengthening configuration. The RSI is at a four month high above 60, with a similar high on the Stochastics above 80, whilst the MACD lines are accelerating higher from a crossover buy signal. The market has broken a key reaction high of the old downtrend at 5200 in the past couple of sessions, whilst there is also a higher low at 5050 and subsequently a small inverted head and shoulders base pattern above 5149 to give a recovery target of 5300. However the key test will now be a long term pivot resistance at 5229 which capped the gains of late July/August. A confirmation of a bullish recovery would now come above 5260, the July high. Corrections are now to be seen as a chance to buy, with around a 50 tick band of support 5149/5200.
The market engaged a sharp intraday turnaround yesterday to close around the day low and show continue the correction of the past week. The move still looks to be a correction within the medium to longer term uptrend, however the bulls are being tested for the first time in a while. There have now been two strong bear candles in the past four sessions and the market is now into the range of support between $1.1820/$1.1910. The concern is that the momentum indicators are on the brink of turning more corrective. The RSI is still above 50 but is actually at its lowest since late June, whilst the Stochastics are also in decline. The five month uptrend comes in at $1.1780 today and the bulls will be increasingly nervous if the $1.1820 support is breached. The hourly chart shows resistance at $1.1925 and $1.1995.
The sterling bulls had a disappointing day yesterday as the market reversed from the breakout above $1.3265. This has now left a high at $1.3328 and a negative candle that cut over 70 pips into the close now leaves a possible correction in play. This has come with the RSI falling back from above 70 (a corrective signal) and the Stochastics also rolling over above 80 (also close to a confirmed corrective signal). The support to watch would be at $1.3160 which has formed the low from this week. If this support is breached then it would suggest a retracement of recent gains is underway. This would then open a retreat back towards $1.3000/$1.3050 again. A second consecutive negative candle today would go some way to inducing this correction. On the hourly chart, watc for the RSI turning back below 30 and MACD lines failing below neutral as a suggestion that negative momentum is taking hold. There is a minor band of resistance now between $1.3220/$1.3250.
The dollar rally continued yesterday, posting a 30 pip gain on the day. However is the rally slowing now? The bull candles are getting smaller, whilst the key resistance 110.65/111.00 is now being tested. This is a key moment for the recovery of the dollar as a confirmed break above 111.00 would change the outlook materially. The overnight move has been tentative but it is likely that the US inflation data will be key this afternoon. Daily momentum indicators are improving but there is still a degree of holding back which would be released on a breakout. The hourly chart shows the progress in the past few days but also that there is a degree of slowing in the recovery as the hourly momentum indicators have just tailed off. The 109.80 pivot is still a factor and is currently supportive. A breach would re-engage the negative pressure.
The correction looked to be slowing yesterday but an intraday sell-off has seen a close below $1227 again and a test of the key nine month uptrend is in play. The uptrend comes in today at $1313 with a confluence of support around this level. The 21 day moving average has been a basis of support since August, whilst there is also the key medium to longer term support band $1300/$1310 too. Momentum indicators are on the brink too. The RSI is back towards levels where the buyers have tended to resume control in recent months (around 55) whilst he Stochastics are in a similar position. The MACD lines are the concern though with a bear cross. As with Dollar/Yen, it is likely that US inflation today will be a key factor but the market looks to be at a near to medium term crossroads now. Resistance is at $1227, with yesterday’s high at $1234.60 as a lower high now.
The market initially found it difficult to decipher the wildly mixed EIA inventories, but the bulls eventually took the positives out of a sharp reduction in gasoline and distillate stocks, to drive the market higher into the close. The outlook subsequently continues with its improvement of the past few sessions. This is gradually pulling the momentum indicators higher once more and the pressure on the $49.42 resistance is building. With the six month downtrend also coming in today at $49.60 this is now a key test for the bulls. The hourly chart shows a sequence of higher lows is now building with yesterday’s low of $48.12 above $47.75 and the key support at $47.00. If $49.42 can be overcome then it will open the August highs at $50.43.
Dow Jones Industrial Average
The market spent much of yesterday’s session in consolidation mode, only to push higher and end up closing at the day high with 40 ticks of gains. This may not sound much but the market is inching ever closer towards the all-time high at 22,179. There is still a bullish bias following on from the breakout above 22,039/22,086 in recent sessions. This band remains a near term basis of support now as the bulls will still be eying a test of 22,179. The daily momentum indicators remain positively configured with the MACD lines crossing higher for a buy signal whilst the RSI is rising above 60 and Stochastics are also strong. A closing breakout above 22,179 would arguably be a breakout of a 500 tick five week range and imply a further 500 ticks in the coming weeks.